There are basically two camps of forecasters of stock prices: the fundamentalists and the chartists. The fundamentalists rely on news, information, statistics, and use reason to integrate all information into a view of the present and reasonable expectation of the future. Chartists, on the other hand, wouldn't give you a plug nickel for news and instead rely on the history of the price movements of markets and stocks, a host of technical indicators to project the course of stock prices, and the market direction. As many do, I use both fundamentals and charts to aid me in making investment decisions. Fundamentals tell me what is and charts tell me what individuals think about what is.

But I also use a third technique of my own making. I'll call it the von Mises determinant of market movements. Ludwig von Mises, considered by many to be the best economist ever, wrote his treatise on economics and entitled it "Human Action.” Its premise is that all economic activity emanates from the values and actions of individuals. It does not claim however that such values or actions are rational. I give you the existence of social fads, bubbles, and manias as evidence of this fact.

Since markets cannot be depended upon at all times to act rationally, and charts merely tell us what happened historically and where we are at any given time, how can either project the future? The answer of course is that they cannot. A market's value, as well as a price of anything, be it commodities or financial instruments, is simply a snap shot of all the values and actions of those participating in buying and selling any particular thing at any particular time. What happens to any particular price in the next second, let alone the next day, month, or year, is by its nature unknowable.

 

So when people say the market is bound to crash along with bonds as interest rates go up and inflation soars and the dollar falls apart, and gold goes to five thousand dollars an ounce, I revert to the wise thoughts of von Mises who shunned predictions in favor of market “truth.” (For more please click to read Bumper Sticker Economics and my March 2010 Kitco commentary Why Prices Have Not Skyrocketed.)

 

So since this is the case, how does one invest? By my theory, one must go with the market. Or, to look at it from a different angle, "follow the money.” Money invested is a tangible manifestation of individual values. Rational or irrational, "right" or "wrong,” the market is the final arbiter of value and price. The key to successful investing is to respect the market whether you agree with it or not. I like to tell people who ask me where I think the market or the price of gold is headed, that I don't listen to anyone when it comes to predictions, including myself. This doesn't mean I don't have an opinion. I always have an opinion--but I don't bank on it. And I certainly won't bet the farm on it!

 

Today, there are more "experts" and "gurus" scratching their heads as to why the stock market keeps doing what it's doing, than in anyone's memory. The bond market is even more unexplainable as millions of individuals continue to invest in financial instruments that return almost nothing. High paid investment managers, all of whom practice the most sophisticated investment techniques making use of ultra high-tech computers and software, are also scratching their heads over the stock and bond markets. The rise defies technical analysis as well as fundamental analysis. But by the von Mises theory of market movement, it doesn't matter. It is what it is. And this is why I use protective stops. I invest based on my opinion of future movements in the economy, markets, and particular stocks and commodities like gold and silver. But I protect myself against my opinions with stops.
 

Using stops limits losses. You can never get trapped in a stock, or even gold as was the case from 1980 to 2001, and find yourself explaining why you are right and the market is wrong. By the end of that exercise you can end up broke. The market's rise, or gold's rise (or fall) may indeed be irrational. But we must always remember that the market can remain irrational longer than we can remain solvent. Respect the market.

 

As I look at the economic landscape around me today I can see about as many positives as negatives. I see why there are bears and I see why there are bulls. Both cases are persuasive. So, with that in mind, I will continue to invest, but cut losses quickly and let profits run. I look for a market trend. That way I can be wrong many more times than I am right and still make money, as long as I keep my losses small. This puts the odds on my side.

 

I often get stopped out of my trading portfolio as we experience volatility, quick corrections, or negative stock reports. I chalk up this kind of market action, which unfortunately happens many times a year, to the cost of doing business. Whether it is flash crashes, false rumors, blatant manipulation, or transient news items that stop me out of a position; these events are inevitable and simply come with the territory. But my stops keep me in the game. I will not make the maximum possible profit, but I will not take the big loss either.

 

Many say that the little guy doesn't have a chance in a market where manipulation, fraud, and high frequency trading exist. Well, I'm the little guy and have survived very nicely over the decades aware of these forces. Like I say, it's the cost of doing business. I say deal with it and move on. While we hear that the little guy has not made money in the market in the last 10 years, these last ten years have been my best years ever in the market, and I’ve been actively investing since 1968. Of course I have followed the money into gold and gold stocks. And I play both the long and short side of markets.
 
So as we all pay close attention to the news and to our charts (as we should), don’t forget to follow the money, as well as to protect your money and your profits from the erratic movements of markets.